Alternative reinsurance capital was once again largely responsible for the expansion of global reinsurance capacity in 2017, as insurance-linked capacity grew 17% to $88 billion by the end of the year, outpacing traditional reinsurance capital significantly, according to Willis Re.
The result is a global reinsurance market once again characterised by excess capacity, which has helped to dampen the hoped for rate rises at renewals so far this year.

James Kent, Global CEO, Willis Re, commented, “2017 was one of the worst years on record for insured natural catastrophe losses. However, today the global reinsurance market is able to deploy more capital than at the same time last year.

“When a few exceptional transactions are considered, total reinsurance capacity is roughly stable, despite the hurricanes, earthquakes, wildfires, and other events which brought misery to millions of people in 2017. That’s a significant achievement for the reinsurance market, and a testament to its strength.”

At the end of 2016 alternative reinsurance capital sat at $75 billion, according to data from Willis Towers Watson Securities.

But by the end of 2017 that figure had increased significantly to $88 billion, reflecting alternative reinsurance capital growth of more than 17% in just one year.

It’s an impressive growth rate and will include some of the reloading of capital that occurred after the impacts of hurricanes Harvey, Irma and Maria, but it likely doesn’t include as much of the fresh capital raising that occurred for the January 2018 reinsurance renewals, which means the size of the alternative capital market is larger than this now.

However the data is counted, the impressive factor is the growth rate and the continued taking of market share from traditional markets, as the ILS fund sector expands and their specialist catastrophe and widening underwriting becomes a staple component of global reinsurance program capacity.

Willis Re, in publishing its latest reinsurance capital report this morning, said that shareholders’ equity in the 34 major reinsurance companies tracked by its Willis Reinsurance Index grew 7.8% to $371 billion by the end of 2017, despite the major catastrophe losses experienced.

Interestingly though, it wasn’t underwriting profits that drove traditional reinsurance capital higher, it was investment returns as the average weighted combined ratio for the tracked reinsurers rose to 104.8%, up 10.4% during the year.

Unrealised investment gains added $34.7 billion, but if you exclude National Indemnity then shareholders’ equity would actually have decreased slightly to $343.7 billion, in which case growth was predominantly driven by ILS markets in 2017.

One of the major reasons ILS markets continue to raise capital is their ability to sustain the lower rate environment, due to a more efficient operating model and lower cost-of-capital.

That means, aside from major loss years like 2017, the returns generated by average ILS funds are akin to reinsurers normalised returns, but of course with lower correlation which makes them attractive to major institutional investors.

Including other major regional and local reinsurers, as well as a pro-rated amount of capital within major groups whose reinsurance portfolio is <10% of total premiums, Willis Re estimates the traditional reinsurance market at $398 billion at the year-end.

The pressure on traditional reinsurers continues to mount, with the ongoing growth of ILS and alternative capital a major driver of competition and a flattener of rates.

Kent explained, “The pressure on traditional reinsurers from alternative capital suppliers is stronger than ever, as many participants in this market cleared their first true major test. This increase in alternative capital, as well as the global reinsurance market having more capital to deploy, is continuing to dampen price increases in the mid-year renewals.”

Willis Re notes that the growth of alternative capital was achieved in the face of its largest ever loss year, “despite the draw-down of some catastrophe bonds and collateralized reinsurance and retrocession layers in the wake of the 2017 Atlantic hurricanes.”

Judging by the execution of recent catastrophe bonds, which have largely priced below guidance, as well as commentary from early price indications on the mid-year reinsurance renewals that are already in the market, the availability of reinsurance capital looks set to dampen price expectations once again, disappointing some, but perhaps also providing opportunity for those prepared to wield the efficiency of their capacity.